2nd Mortgage – A mortgage on real estate which has already been pledged as collateral for an earlier mortgage. The second mortgage carries rights which are subordinate to those of the first. Priority in settlement of claims is given to the earlier mortgage.
Acceptance Letter – This is the letter the client signs when they accept the offer made by a Lender. This letter advises the Lender, broker and GCC that the client will proceed with the loan under the terms specified and means that they accept the fees that are associated with the loan.
Amortisation – Repayment of the loan amount (principal) over a period of time. This is in contrast to an interest only facility, which only requires interest payments to be made, with the principal amount repayable in full or rolled over at the expiration of the facility.
BBSY – Bank Bill Swap Reference Rate (BBSY) is the most commonly referred to reference rate in Australian interest rate markets for variable rate loans, while the SWAP Rate is the reference rate for fixed rates.
Interest rates can be fixed for up to five years, alternatively, you can choose to reset your fixed rate every 90 days on a variable facility. Interest rates are priced off market related benchmarks, which fluctuate according to money market movements. These rates are published daily in the Financial Review.
A Margin is added to the BBSY or the SWAP Rate to obtain an interest rate applicable to the Borrower.
Coded Loan – A loan subject to the National Consumer Credit Protection Act. The NCCP regulates all consumer credit including housing loans where the borrowers borrow in their individual names. The NCCP Act suggests that it does not apply to company borrowers.
Counter Party Risk – This relates to the level of risk of a tenant on a proposed security property. The stronger the tenant (based primarily on tenancy schedule) the more comfort there is in the overall proposal.
Debt Service Cover Ratio (DSR, DSCR or ICR) – This can be the ratio for “property” or Interest Cover (rental of proposed security / interest) on the loan being sought or “all sources” (Income from all sources / all commitments). The DSR sought for “property” and “all sources” is generally a minimum of 1.5 times for full doc transactions.
End Value – Also known as the gross realisation of a development. The end value is the GST exclusive dollar amount that the market will achieve for the finished product.
Equity – The difference between the value of an asset and the debt secured by the asset. Equity Funding – When the borrowing entity has minimal or no equity and seeks further funding behind the 1st mortgage.
Equity Funding is a more expensive source of funds when compared to a 1st mortgage advance due to the higher risk attached to the advance.
Exit Strategy – Outlines how a Lender will get their money back at or prior to expiry of the facility or in the event of default. This provides a Lender with reassurance that the borrower is capable of meeting all commitments and obligations as per the loan agreement.
Going Concern – Where the borrower is purchasing / refinancing a property which they operate a business from and the property is specifically used for that type of business (ie child care centre, hotel / motel, petrol station). In theses cases, the Lender will also require a charge over all licences, permits and approvals in addition to a registered first mortgage over the freehold property.
Gross Realisation Value (GRV) – In property construction terms, Gross Realisation is the property’s GST exclusive value (or gross sales) upon completion of construction.
Hard Costs – Hard Costs typically comprise all costs related to the development except interest and soft costs such as stamp duty, legal fees, professional fees and the like.
Indicative Funding Proposal (IFP) – Upon receipt o fa completed Enquiry Form, GCC issues the client (via the GCC accredited broker) an IFP. The IFP summarises the parameters of the proposed loan facility (indicative interest rates, fees, term etc) GCC believes it is able to secure from a lender. An IFP Does NOT constitute as a commitment to any funding.
Institutional Lenders – These include superannuation funds, mortgage trusts, banks and the like where they have money invested in their company and their role is to ensure that a good rate of return is provided to their investors.
Interest Cover (Standalone) – This is the level of rental return on a proposed security property over the interest on the proposed loan. An example of this is where the rental return is $150,000 per annum and the interest on the loan is $100,000 per annum, the Interest Cover is 1.5 times.
Land-Banking – The holding of undeveloped sites that are intended for development in the future.
Margin – The difference between the BBSY or SWAP Rate and the rate charged to the borrower.
Margin Scheme – The margin scheme is an alternative method of calculating the GST payable on sales of real property. It allows sellers of real property to pay GST equal to one-eleventh of the ‘margin’ rather than one-eleventh of the total sale price.
Depending on when, and from whom, the property was purchased, the margin is generally the difference between the sale price and:
- the amount the seller paid for the property, or
- a valuation of the property at a given date.
Mezzanine Finance – The purpose of a Mezzanine loan is to allow the borrower to secure a higher LVR than normally provided by a senior debt provider. Mezzanine Finance ranks behind a senior debt. By definition, a mezzanine loan is a hybrid of debt and equity, generally subordinate to any senior debt. The interest rate margins on Mezzanine loans are significantly higher. In addition to this higher rate, mezzanine financing may contain a convertible feature, which allows the lender to realize any gains associated with a project’s success.
Panel Valuer (or other Consultants) – Lenders require valuations of the properties that they are taking as security for a mortgage. Some Lenders have an approved list of panel of Valuers (and other consultants such as Quantity Surveyors) who will undertake valuations on behalf of the Lender. If a borrower already has a valuation from a non-panel valuer, it is at the discretion of the lender as to whether the valuation will be acceptable.
Passive Investment – Property which is purchased / held for the purpose of obtaining rental income or capital growth as a medium to long term investment.
Pre Sales – Generally applies to construction facilities. Refers to the sale of a property / lot prior to commencement of a construction project. (Note: A Lender may require a certain percentage of Pre Sales confirmed prior to advancing funds).
Redraw Facility – A redraw facility allows you to make additional repayments on your mortgage, and then have access to the additional repayments if needed. There may be conditions attached to the Redraw Facility that can include a minimum amount and a fee for usage.
Residual Stock – Unsold property / lots at the completion of a construction project.
Residual Stock Loan – As the name implies, this takeout product allows for the funding of completed but unsold development stock for up to 12 months to allow the Developer time to sell the stock. It allows capitalisation of interest during the term of the loan.
Senior Debt – A loan secured by a first mortgage.
Senior Subordinate – Ranks next in line behind the senior debt. When the security property is sold senior debt is paid first, senior subordinate next, followed by junior subordinate debt and any other lower ranking secured debt.
Soft Costs – Soft Costs refer to project expense items that are not considered direct construction cost. Soft costs include architectural, engineering, financing, and legalfees, sales & marketing expenses and other pre and post-construction expenses.
SWAP Rate – Refer to BBSY
Syndicated Loan – Syndication is defined as an association of business people or companies to undertake a project requiring a large amount of capital. In terms of a loan, it refers to a situation where a loan is of such a large size or complex risk profile, that it is too much for one Lender to do alone, so a number of Lenders club together and each contribute a portion of the total loan proceeds. The result may be a $50 million facility where five Lenders each contribute $10 million under common terms and conditions.
Total Development Cost – In property construction terms, Total Development Costs are defined as being all costs associated with the development, including but not limited to:
- Land – at the value determined by the valuer or purchase price, generally whichever is lower, at the discretion of the Lender.
- Construction Costs – as certified by a Quantity Surveyor appointed by the Lender.
- Professional Fees – as certified by a Quantity Surveyor or Valuer appointed by the Lender.
- Marketing Costs – all reasonable marketing costs as determined by the Lender.
- Management Fees – all reasonable management fees payable to the Developer
- Council Contributions – all statutory enforceable contributions
- Legal Fees / Stamp Duty – all reasonable legal fees and stamp duty required to be paid in the ordinary course of business.
- Rates / Taxes – all bona fide statutory rates, taxes and charges during the construction period.
- Establishment Fees – all bona fide Lender establishment fees.
- Interest – all interest in respect of facilities held.
Trustee – A person appointed to manage and safeguard the assets of a trust in the best interests of the beneficiaries of the trust.
Uncoded Loan – A loan that is not subject to the National Consumer Credit Protection Act. The NCCP regulates all consumer credit including housing loans where the borrowers borrow in their individual names, but not advances to company borrowers. Also all commercial loans are un-coded.